GuarantyTrust Bank Plc: Remarkable third quarter performance points ahead TOP-LINE EARNINGS ROSE SIGNIFICANT AMID ECONOMIC SITUATIONS.
Guaranty Trust Bank Plc (GT Bank) is an internationally focused commercial bank providing a range of banking products and services to corporate, commercial, and retail customers in Nigeria, West Africa, and Europe. The company focuses on acquiring and managing strategic businesses that create long term shareholders’ returns and socioeconomic impact. The Bank’s management recently released third quarter result for the period ended September 30th 2016, the performance metrics shows substantial positive growth in revenue and profitability compared to the corresponding period of 2015 despite a protracted economic recession caused a number of tough macroeconomic factors which includes: unstable foreign exchange terrain, unexpected increase in prices, decline in income and expenses, and easy adjustment and absorption to changing banking regulation,. Guaranty Trust Bank Plc posted a significant rise of 43.56% in gross earnings to N329.28 billion in September 2016 from N229.38 billion in the corresponding period of 2015 largely driven by other income which grew by a remarkable 1250.32%, and interest income which grew by a 5.17% to N181.91 billion compared to N172.96 billion recorded over the same period of 2015. Interest expense on the other hand grew by dropped by 6.95% to N49.16 billion in September 2016 from N52.83 billion recorded in September 2015. The high and constant interest rate environment throughout the period and an unchanging Banks’ Cash Reserve Ratio (CRR) resulted in increase in competition for deposits amongst banks but GT Bank was able to manage its interest expense. Expectedly the bank’s net interest income grew notably by 10.50% to N132.75 billion in September 2016 from N120.13 billion in the corresponding period of 2015.
OTHER INCOME AND FEES EARNED LEADS TO SIGNIFICANT GROWTH IN NON-INTEREST INCOME
The Bank reported non-interest income of N147.37 billion for the third quarter ended, September 2016 from N56.4 billion recorded in the corresponding period of 2015; reflecting a substantial growth of 161.25%. This was an impressive performance as fee and commission rose by 27.11% on the back of substantive increase in income generated from e-business products and services which suitably replace the phased out Commission on Turnover (COT) by the CBN; a hitherto significant source of income to banks. Also, growth in non-interest income was despite decrease in net gains on financial instruments classified as held for trading which decreased by 69.23% to N3.01 billion from N9.79 billion over the period reviewed.
IMPRESSIVE GROWTH IN PROFITABILITY ON THE BACK OF EFFICIENTLY MANAGED OPERATING EXPENSES
The Bank’s well venerated operational efficiency is a tradition that GT Bank strongly upholds. The Bank has been able to consistently sustain its effective cost management strategies and hence profitability. Despite running a leaner branch network compared to its peers, the Bank conveniently generates more competitive profit year after year. This renowned efficiency is also sustained in the period under review as the Bank grew operating expenses by a modest 8.24% to N79.93 billion from N73.8 billion recorded in 2015, while operating income rose by a considerable 478.74% to N96.96 billion from N16.75 billion over the period. The combination of efficiently managed operating expenses and substantial growth in gross earnings steered profitability higher. Thus, pre-tax profit grew significantly by 52.98% to N140.84 billion in September 2016 from N92.06 billion in in the corresponding period, September 2015, while net income grew substantially by 59.56% to N119.93 billion from N75.16 billion over the same period.
IMPROVEMENT IN ASSET QUALITY AND KEY FINANCIAL METRICS
GT Bank maintained its leading position in terms of margin and cost efficiency. Pre-tax profit margin declined slightly to 42.77% from 41.93% over period while net income margin also followed suit with an increase to 36.42% from 34.23% during the same period. In addition, the Bank’s cost to income ratio also declined marginally to 36.20% in September 2016 from 44.51% in September 2015. At 37.62%, the Bank’s liquidity ratio remains above the minimum regulatory requirements of 30% while capital adequacy ratio remains strong at 18.10%, well above the regulatory requirement of 15%. In relation to assets quality, nonperforming loan (NPL) ratio rose to 4.13% in September 2016. Furthermore, the Bank shareholder’s fund improved by 19.01% to N492.20 billion in September 2016 from N413.56 billion in December 2015. The Bank’s return on assets and shareholders’ equity rose remarkably. Return on average asset (ROA) grew to 4.27% in September 2016 from 3.06% in December 2015 while return on equity (ROE) grew to 26.48% from 18.76% over the period under review.
HOLD RECOMMENDATION DESPITE BRIGHT OUTLOOK
The CBN’s monetary tightening policies have resulted in limited income generation and high cost of funds within the Nigerian financial system. The CBN has maintained the CRR at a high level with a view to maintaining price stability and support the stability of the Naira exchange rate. Despite the regulatory headwinds prevalent which saw inflation soar to 17.70% as at September 2016 from 9.4% a year ago, MPR at 14% and the CRR on all public sector deposits at 22.5%, GT Bank delivered another impressive performance. While this policy aimed at controlling monetary liquidity in the economy foreshadows huge negative impact on the banks’ operations, the Bank’s management is capable of increasing performance that will further strengthen earnings, income generation capacity and growth in liquidity base. We maintain our projection of N339.48 billion for gross earnings and net income of N111.29 billion for the financial year ending December 2016, leading to a forward EPS of N5.77. Using an industry price to earnings multiple (PE) of 5.03x, we arrive at a six-month average target price of N28.64. Since this represents an upside potential of 8.90% on the current stock price of N26.30, we therefore recommend a BUY.
WHILE THIS POLICY AIMED AT CONTROLLING MONETARY LIQUIDITY IN THE ECONOMY FORESHADOWS HUGE NEGATIVE IMPACT ON THE BANKS’ OPERATIONS, THE BANK’S MANAGEMENT IS CAPABLE OF INCREASING PERFORMANCE THAT WILL FURTHER STRENGTHEN EARNINGS, INCOME GENERATION CAPACITY AND GROWTH IN LIQUIDITY BASE